September 6, 2012

KB and Bain Capital

This is the last of a
three part series on Bain Capital. Some
have questioned the need for me to write about Bain. My response is in the form of a
question: Why should the toy industry be
the only segment of the population not discussing a major toy retailer that has
become an issue in the election?

Rather than just looking
at KB Toys, however, I think it is more important to consider Bain Capital as a
major player in the toy industry for over 10 years. Owing
the number 1 (Toys R Us) and having owned the number 2 (KB Toys) toy chains
certainly makes it a rival to Wal-Mart in shaping the toy markets. It seems to me a fair question to ask
is: Has Bain Capital been good for the
toy industry? Has the toy industry been
good for Bain Capital?

Analyzing the relationship
between KB and Bain is a challenge. Any
strong emotions that may have previously existed have been exacerbated by an
election in which Venture Capital companies like Bain have become an issue. In addition, between the two bankruptcies, a
lot of people lost jobs (6400 between the two bankruptcies) and many companies
lost money. This in turn creates strong
feelings.

Some of you have been in
the toy industry long enough to remember when KB (Kay-Bee) was a major player
in the toy industry with some of the sharpest people and toughest negotiators
in the business (if you ever called on KB you know what I mean); as good as
they were, times passed them by.

KB was purchased by Bain in 2000. The
company subsequently filed for bankruptcy in 2004 and was purchased
out of bankruptcy by Prentice Capital Management in 2005. KB ceased to exist in 2008.

What complicates all of
this is that there are a number of variables involved in KB’s ultimate demise:

The business
model

Some question whether KB’s
business model was still viable. Here is
how Obit magazine described the
company’s demise in 2008:

The
growth and expansion of Wal-Mart offered the latest toys at deep discounts …
Toys “R” Us …emerged stronger than ever [and] simultaneously, grocery stores,
drug chains and mid-tier retailers like Target and Kohl’s also became players
in the business. KB, averaging a minuscule 1,300 square foot per store,
couldn’t compete on price or selection…As mall traffic has dwindled and the
economy sunk deeper into recession, the toy industry has been more resilient
than most. But it still is an item-driven business, powered by the specific
requests and interests of children and not just by price. That wasn’t’ KB’s
business model. They were ultimately overwhelmed by too many factors from size
of stores to ability to stock goods to new economic realities…

The debt load

Bain’s style was to pay little in the way of cash and borrow the rest. In the case of KB, Bain paid $18 million in
cash and borrowed $302 million. According
to The New York Times “Just 16 months later, the toy
company borrowed more to pay Bain and its investors an $85 million
dividend.” Some feel that it was this
debt load that led to the subsequent 2004 bankruptcy.

KB was leaner and meaner

Others feel that Bain made good moves by
closing underperforming stores and letting employees

go. This made the company
more competitive and allowed it to keep operating. Yes, some lost jobs but many others did not.

The economy

Still others feel that it was the recession. The economic collapse in 2008 was just too
much for KB. GE Capital chose to end KB’s
line of credit. That forced the company into bankruptcy.

So, was Bain Capital good for KB and was KB good for Bain Capital? It would appear, based upon The New York
Times article cited above, KB was ultimately good for Bain Capital.
The principals appear to have made money on their investment.

Was Bain good or bad for KB? I think
that the question is too complicated to assign blame to any one party. The debt load certainly contributed to the
company’s demise but bigger factors were beyond anyone’s control: The struggling macro economy and basic changes in how
Americans shopped just to name two.

Overall, Bain Capital has had a major impact on the toy industry. To what degree it has been good or bad is
open to debate. What cannot be debated
is that Bain Capital has since 2000 made a big difference in the lives of toy
industry individuals and companies.

Comments

What role did the internet, and Amazon, play in the demise of Kay Bee? I remember Kay Bee as an "aspirational" store. As a child, I would go to Kay Bee to do research into toys while my parents took care of grown up shopping at Sears or Macy's (our mall had one of each.) My birthday and Christmas lists would be assembled largely out of what I saw at Kay Bee. Then my parents, well, my Mother, would return to Kay Bee to purchase the requested items. Now, of course, she could take my list to Amazon.

I think you could make a better case that WalMart had a bigger impact on the demise of K-B than Bain Capital. The reason that most manufacturing is now in China is solely due to government regulations and policy not becuase Bain Capital bought and sold sick companies.
The real question is whether the finances of our country are better off in the hands of someone who understands money, how to evaluate investments, and how to make good choices. Or with someone who's philosophy is to spend one's way out of debt.

I think this discussion is out of place. Romney was out of Bain for 2 years when they purchased what was left of KB.
If we are discussing Bain --how about discussiong the disaster that the current occupant of the White House is to business. Bain is irrelevant to this election. But the detrimential policies of Obama should be the focus.